The future of film distribution will take a cue from the pirates of today.

Piracy is the sum of all of Hollywood’s digital fears. All it takes is a leaked print of a film from a studio mole, or an advance copy from an Academy Award screener, or a filched workprint, and you have a pirated version ready to download.

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So far, only one thing has prevented movie piracy on the scale that has cost the music industry about 25% of its revenues: file size. It may take just a minute to pull down a Kelly Clarkson tune from the Net, but a two-hour movie could take a day, depending on your connection speed. That’s already changing. Peer-to-peer (P2P) networks such as BitTorrent and eDonkey, already used by tens of millions of people around the globe, are making it easy to share feature films by breaking up each giant file into tiny pieces. When a P2P user downloads a movie, it comes from thousands, if not millions, of hard drives; the more popular a film is, the more people are able to share it–and the faster the download. By the end of 2004, about 60% of Internet traffic was P2P activity, more than half of it video files, according to CacheLogic, a P2P company based in Cambridge, England.

With the P2P growth curve leaving Hollywood little hope for escape, the industry faces a turning point. Like the music business, it can try to save itself in the courts. But suing your customers isn’t the smartest business move. (Besides, when the Motion Picture Association of America shut down some of the bigger BitTorrent servers, users simply migrated to eDonkey.) Or the studios could just accept the inevitability of Internet distribution. “Properly managed and implemented, P2P is the future of Hollywood and television,” says Dmitry Shapiro, CEO of Veoh Networks, which lets broadband users create virtual television networks.

The music business does offer one encouraging example here: Steve Jobs. “Apple’s success with the iPod and iTunes store shows that people will pay for copy-protected music if it is convenient and priced fairly,” says Todd Johnson, chief executive officer of Kontiki, a Sunnyvale, California, company that sells P2P software to deliver video over the Net.

Transfer iTunes’ quality and convenience to movie downloads, says Johnson, and the results would transform the industry. “By the middle of next year, consumers will have access to movies, sports, and TV shows through an online, TiVo-like experience,” he predicts.

Before that can happen, though, the studios will need to be convinced that they won’t face a piratical onslaught. Kontiki’s solution is a closed P2P system, one based on membership rather than on an open network such as BitTorrent’s. Coupled with Microsoft’s Digital Rights Management, Kontiki harnesses P2P networking without giving unauthorized users access to its content. Johnson believes several business models could emerge: Content could be sold by monthly subscriptions or sold outright as iTunes does–or it could support advertisements before or even during a movie.

Clearly he’s doing something right. Twenty million people have already used Kontiki software, and the company has signed deals with AOL, Cinequest (an independent film festival), and Open Media Network, which has 15,000 movies, video blogs, audio podcasts, and music files. The BBC began a three-month trial of Kontiki in September, letting 5,000 viewers watch programs online for up to seven days after they were broadcast on TV.

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Now Johnson’s angling for a deal with the Hollywood studios. So is Bram Cohen, BitTorrent’s creator, who raised $8.75 million in venture capital in September. Whether that contest ultimately goes to Johnson, Cohen, or some kid still in high school, the point is that the studios can coexist with–and probably thrive on–the Internet. But they’d better get started. They have no choice.

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A version of this article appeared in the December 2005 issue of Fast Company magazine.

About the author

Adam L. Penenberg is a journalism professor at New York University and author of several books